WPS5553
Policy Research Working Paper 5553
Agriculture and Development
A Brief Review of the Literature
Jean-Jacques Dethier
Alexandra Effenberger
The World Bank
Development Economics
Research Support Unit
January 2011
Policy Research Working Paper 5553
Abstract
After 20 years of neglect by international donors, employment and food price stabilization. This paper
agriculture is now again in the headlines because higher reviews what the economic literature has to say on these
food prices are increasing food insecurity and poverty. topics. It discusses in turn the role played by agriculture
In the coming years it will be essential to increase food in the development process and the interactions between
productivity and production in developing countries, agriculture and other economic sectors; the determinants
especially in Sub-Saharan Africa and with smallholders. of the Green Revolution and discuss the foundations
This however requires finding viable solutions to a of agricultural growth; issues of income diversification
number of complex technical, institutional and policy by farmers; approaches to rural development; and
issues including land markets, research on seeds and finally issues of international trade policy and food
inputs; agricultural extension; credit; rural infrastructure; security which are at the root of the crisis in agricultural
storage; connection to markets; rural nonfarm commodity volatility in the past few years.
This paper is a product of the Research Support Unit, Development Economics. It is part of a larger effort by the World
Bank to provide open access to its research and make a contribution to development policy discussions around the world.
Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The authors may be contacted
at jdethier@worldbank.org and Alexandra_Effenberger@brown.edu.
The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development
issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the
names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those
of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and
its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.
Produced by the Research Support Team
Agriculture and Development.
A Brief Review of the Literature
Jean-Jacques Dethier and Alexandra Effenberger 1
January 2011
Table of Contents
Introduction ................................................................................................................................................... 2
The Role of Agriculture in Development ..................................................................................................... 6
Agriculture, Growth and Poverty Reduction ............................................................................................ 6
Agriculture and the Urban Bias .............................................................................................................. 11
The Foundations of Agricultural Growth.................................................................................................... 13
Green Revolution and Technology Adoption .......................................................................................... 13
Agricultural R&D and Appropriate Technologies.................................................................................. 15
Extension Services as a Means to Foster Adoption ................................................................................ 18
Environmental Challenges ...................................................................................................................... 19
Barriers to Technology Adoption............................................................................................................ 21
Farm Size and Land Tenure .................................................................................................................... 23
The Rural Non-Farm Sector and Rural Development................................................................................. 27
Income Diversification in Rural Areas ................................................................................................... 27
Changing Approaches to Rural Development ........................................................................................ 30
Agricultural Policy and Food Security........................................................................................................ 35
Market Distorting Policies of Developed Countries ............................................................................... 35
Food Security, the Recent Food Price Crisis and Its Consequences ...................................................... 38
Price Transmission and Stabilization Policies ....................................................................................... 41
Mitigating Food Price Volatility and Ensuring Food Security............................................................... 43
Conclusion .................................................................................................................................................. 44
References ................................................................................................................................................... 47
1
Jean-Jacques Dethier (jdethier@worldbank.org) is with the World Bank, Washington, and Alexandra Effenberger
(Alexandra_Effenberger@brown.edu) with Brown University, Providence. We are grateful to Jock Anderson, Alain
de Janvry, Shiva Makki and Will Martin for useful comments and suggestions. Any errors remain entirely ours.
1
Introduction
The agricultural sector continues to play a crucial role for development, especially in
low-income countries where the sector is large both in terms of aggregate income and total labor
force. The World Bank`s 2008 World Development Report, Agriculture for Development,
explained why the decline in the support of agriculture by international donors (see Figure 1)
was so damaging for the progress of growth, development and poverty reduction in poor
countries. The report was a landmark document that described masterfully the various
dimensions of the challenge and helped rekindle interest in agricultural policy. But with the food,
financial, and climate crises of the past three years, much has changed since the report was
released in late 2007. A major concern has been increased exposure to shocks, worsening food
insecurity and vulnerability to poverty.2 It seems to be an appropriate time to review the
economic literature on agriculture, focusing on the issues that are critical for agricultural
productivity and poverty reduction. This is the modest ambition of this paper.
In the first section, we discuss the role played by agriculture in the development process
and the interactions between agriculture and other economic sectors. Agriculture contributes to
both income growth and poverty reduction in developing countries--by generating income and
employment in rural areas and providing food at reasonable prices in urban areas. The sector
matters greatly in low-income countries where about 60 percent of the labor force is employed in
agriculture: it accounts for 25 percent of GDP (but only 9 percent in middle-income and 1
percent in high-income countries). Of the 5.5 billion people who live in developing countries, 3
billion live in rural areas. Agriculture is the main source of livelihood for 86 percent of these
rural households. Some 75 percent of poor people still live in rural areas and derive the major
part of their income from the agricultural sector and related activities. Agriculture provides food,
income and jobs and hence can be an engine of growth in agriculture-based developing countries
2
In an interview with Newsweek magazine (January 23, 2011), the President of the World Bank, Robert Zoellick,
stated that the largest challenge facing most developing countries in 2011 is the risk of a big boost in food prices. He
saw two challenges related to agriculture. First is the need to increase food productivity and production in
developing countries, especially in Sub-Saharan Africa and with small-holder farmers. To achieve this, a number of
problems need to be addressed: property rights; R&D for seeds and inputs; irrigation; fertilizer; agricultural
extension; credit; rural infrastructure; storage; and connection to markets. The second problem is the volatility of
food prices, often because of events outside the control of poor countries. An interconnected combination of steps
could help ensure that the most vulnerable countries and people get the nutrition they need.
2
and an effective tool to reduce poverty in transforming countries.3 Balancing agriculture and
industry is an important--though difficult--dimension of development policy. Recently agro-
pessimist views--based on the observation that agriculture in developing countries is often the
least productive sector--have been voiced in the literature.4
In the second section, we look back on the determinants of the Green Revolution and
discuss the foundations of agricultural growth. In developing countries that have experienced
sustained increases in yields, the mode of agriculture has been intensive and has involved
adoption of new varieties by farmers, irrigation and massive use of fertilizer--with predictable
environmental consequences--which presupposes good institutions. In the coming decades,
massive productivity increases in Sub-Saharan Africa will be necessary if the subcontinent is to
catch up with the rest of the world. The challenge is thus of a different nature than before.
Further cropland expansion (which was the basis for the slow yield increases that took place in
the past), with a few exceptions, is really not possible. New seeds that are resistant to climate
risks and adapted to local conditions will need to be developed and sustainable irrigation systems
expanded. The most difficult challenges are institutional and economic. Often smallholders
cannot internalize the benefit of their efficiency (compared with large farms) because of missing
markets for insurance and credit, low education levels, limited market access and market
information, and insecure property and usage rights. Hence, although new advances in R&D--
such as genetically modified organisms and extension services--are important for future growth
and poverty reduction, getting fundamental institutions right is a prerequisite for growth and a
priority on the agricultural development agenda.
3
The 2008 World Development Report establishes a typology of countries (World Bank 2007). In agriculture-based
economies, agriculture contributes on average 32 percent to overall economic growth and the majority of the poor
live in rural areas, In transforming countries, agriculture contributes on average 7 percent to overall growth but
poverty is still mostly rural. In urbanized countries, agriculture accounts for only 5 percent of economic growth and
urban poverty is higher than poverty in rural areas.
4
Of course, at the early stages of development, agricultural growth is an important source of overall economic
growth and a major driver behind structural transformation of the economy. But authors like S. Dercon or D. Gollin,
while accepting this fact, observe that linkages between agriculture and industry are less important for overall
growth in open economies (in which goods from productive sectors including agriculture are traded) than in more
closed economies. Their main argument is that, in an open economy, importing food and focusing efforts on other
sectors might be more beneficial to a country`s development if it is difficult to increase the productivity of
agriculture.
3
In the third section, we broaden our focus and look at the rural sector as a whole,
examining why rural households diversify their income and reviewing various approaches to
rural development. Non-farm employment is an important income source for the poor and an
effective way out of poverty for rural households, as well as a means to cope with missing
insurance and credit markets. However, while the rural non-farm sector is a source of additional
employment opportunities and an instrument to reduce poverty, diversification of income by
farmers does not necessarily guarantee upward mobility. In order for this to happen, proper
education and information about and access to non-farm jobs are necessary. As a consequence,
rural development programs have to incorporate such needs into their strategies. Past
experiences have shown that private provision of certain goods and services can easily fail and
therefore it is important to have an enabling state to orchestrate and initiate these activities
without being their sole purveyor. Their implementation should take advantage of private sector
initiatives and local civil society expertise. New approaches such as community-driven
development can be successful in managing common resources and local projects. But the lesson
from the past is that they fail in the absence of egalitarian preferences and social capital among
community members. Balancing centralization and decentralization of program
implementation--a difficult undertaking--is hence the key for successful rural development.
In the fourth section, we review trade policy and food security concerns in the light of the
deadlock in the Doha round, the 2008 crisis in agricultural commodity prices, and today`s
volatility in food prices. We argue that insulating poor people from world food price swings and
the elimination of trade barriers for developing country agricultural exports, in the context of the
WTO trade negotiations, are both of utmost importance for the reduction of poverty in low-
income countries. Developed countries should reduce these trade barriers further as low-income
country exports are mainly agricultural goods and these countries lose most from current
protectionism. For the negotiations to succeed, this must go hand-in-hand with a reduction in
trade barriers by developing countries. Price volatility and beggar-thy-neighbor policies to
stabilize prices and guarantee national food security by some countries during the 2008 food
price crisis have harmed vulnerable and poor populations and reversed some past gains in the
global effort to reduce chronic poverty. Trade and market interventions to stabilize agricultural
prices have failed or met with very limited success. Even when unilateral policies have
succeeded in stabilizing domestic prices, they have increased the volatility of international prices
4
even more and this eventually leads to a vicious circle of similar responses by other countries.
Because the main purpose of stabilization and food security policies is to mitigate the impact
on the poorest income groups (those most affected by food price changes), the focus should be
on mitigation and risk management strategies for these groups. There is evidence that some
social safety net and insurance policies can offset agricultural price shocks and help poor
households to prevent food insecurity and cope with idiosyncratic shocks to their income.
However, the best instruments to protect small farmers from income shocks are ex ante
measures, such as increased productivity, that reduce the risk of shocks in the first place.
Figure 1. Trends in Aid to Agriculture
Aid commitments, 1973­2008, 5-year moving averages and annual figures, constant 2007 prices
Source: OECD DAC
5
The Role of Agriculture in Development
Agriculture, Growth and Poverty Reduction
Having been a key preoccupation of developing country governments, donors and the
international community during the 1960s and 1970s, agriculture disappeared from the
development agenda in the 1980s and 1990s, only to reappear in the first decade of the 21st
century because of neglect and underinvestment (see Figure 1). There is now renewed interest in
the problems of the sector--not to a small extent, thanks to the 2008 World Development
Report. For example, the G8 countries promised $22 billion for investment in agriculture during
their meeting in Aquila, Italy in 2009 (de Janvry 2010).
Developing economies have generally been described as dual economies with a
traditional agricultural sector and a modern capitalist sector.5 Productivity is assumed to be lower
in agriculture than in the modern sector. The canonical model was put forward by Lewis (1954)
and subsequently extended by Ranis and Fei (1961). Lewis` model rests on the idea of surplus
labor existing in the agricultural sector. With lower productivity in agriculture, wages will be
higher in the modern sector, which induces labor to move out of agriculture and into the modern
sector, which in turn generates economic growth. Other precursors, such as Schultz (1953), also
point out the importance of food supply by the agricultural sector. In Schultz`s view, agriculture
is important for economic growth in the sense that it guarantees subsistence for society without
which growth is not possible in the first place. This early view on the role of agriculture in
economics also matched the empirical observation made by Kuznets (1966) that the importance
of the agricultural sector declines with economic development. In this view, agriculture`s role in
economic development is to supply cheap food and low wage labor to the modern sector.
Otherwise, both sectors have few interconnections. Growth and higher productivity in the
agricultural sector can contribute to overall economic growth by releasing labor as well as capital
to other sectors in the economy. However, industrialization is seen as the ultimate driving force
behind a country`s development and agriculture as a traditional, low productivity sector.
5
For a more detailed treatment of such models see, for example, Cypher and Dietz (2008), Diao et al. (2006) or
Barrett, Carter and Timmer (2010).
6
Improving on the Lewis model, Johnston and Mellor (1961) account explicitly for
agriculture as an active sector in the economy. In addition to labor and food supply, agriculture
plays an active role in economic growth through important production and consumption
linkages. For instance, agriculture can provide raw materials to nonagricultural production or
demand inputs from the modern sector. On the consumption side, a higher productivity in
agriculture can increase the income of the rural population, thereby creating demand for
domestically produced industrial output. Such linkage effects can increase employment
opportunities in the rural non-farm sector, thereby indirectly generating rural income. Moreover,
agricultural goods can be exported to earn foreign exchange in order to import capital goods.
The importance of such linkages was further stressed by Singer (1979) and explicitly
embodied in Adelman`s general equilibrium idea of agricultural demand led industrialization
(ADLI), according to which, because of production and consumption linkages, a country`s
development strategy should be agriculture-driven rather than export-driven and increased
agricultural productivity would be the initiator of industrialization. Moreover, emphasis should
be placed on small-to-medium-size farmers because they are more likely to use domestically
produced intermediate goods as opposed to large-scale producers who might import machinery
and other inputs, which would weaken the linkages between agriculture and other sectors
(Adelman 1984).
The fact that there are important linkages between the traditional and modern sectors in
developing countries makes agricultural growth an important instrument for decreasing poverty.
The contribution to poverty reduction takes place directly, through the effects of agricultural
growth on farm employment and profitability, and indirectly because increases in agricultural
output induce job creation in upstream and downstream non-farm sectors as a response to higher
domestic demand. Potentially lower food prices increase the purchasing power of poor
consumers. The magnitude of these effects for poverty reduction depends on the specific
circumstances of an economy. If, for example, technological progress in the agricultural sector is
labor-saving, farm-employment might not necessarily increase (Irz et al. 2001).
While most of the literature views agriculture as an active and dynamic economic sector,
some authors reach quite different conclusions. As pointed out by Gollin (2010), the large share
of agriculture in many developing economies does not immediately imply that overall growth
7
has to be based on an ADLI-type strategy. Matsuyama (1992) suggests that the relation between
agricultural growth and overall economic growth depends on the openness of a country to
international trade. Whereas agricultural growth goes hand in hand with economic growth in
small, closed economies--where gains in agricultural productivity will lead to the linkage effect
described above--the relation might be reversed in the case of an open economy. If the country
has a comparative advantage in agriculture, openness to trade will draw resources away from the
modern sector into agriculture, which might be less productive than industry. The importance of
the degree of openness of a country was pointed out early on by proponents of agriculture-first
approaches to development. For instance, Fei and Ranis (1961) acknowledged that imports could
potentially substitute for domestic agricultural products. Adelman (1984) suggested that ADLI
would work best for low-income countries that are not yet export-driven; and Foster and
Rosenzweig (2003) stress that the tradability of rural non-farm sector goods can have different
implications. In a general equilibrium perspective, productivity gains in the agricultural sector
have a negative impact on the tradable non-farm sector. This is because agricultural products as
well as rural non-farm non-tradables have a relatively inelastic demand for labor, whereas
tradable goods have more elastic labor demand. If wages increase due to greater agricultural
productivity, factories producing tradable goods, which are assumed to be operated by external
producers, will move to escape the higher wages.
There is also a vast literature ranging from critical contributions that do not support
agriculture-first approaches to more recent agro-pessimism views. The latter are based on
the observation that agriculture in developing countries might be the least productive sector in
the economy. Dercon (2009) derives his conclusion from a two-sector model elaborated by
Eswaran and Kotwal (1993). He explains that, in an open economy, in which both agricultural
and modern-sector goods can be traded, linkages between the two sectors become less important
for overall growth. As a result, there is less of a necessity to increase agricultural productivity to
induce overall growth and reduce poverty. Both sectors can contribute to growth. But if
agriculture is less productive than other sectors, importing food and focusing efforts on other
sectors might be more beneficial to a country`s development. Both Dercon and Gollin admit that,
under certain circumstances, the agricultural sector can be crucial for economic growth. If
countries are landlocked and closed to international trade, agriculture can be a main driver
behind overall growth and should be supported actively.
8
Although various theoretical models suggest quite opposing roles for agriculture in
development, they do not necessarily contradict each other. The models are derived under
different economic assumptions (e.g., openness to trade). Therefore, it is not surprising that they
derive different policy implications. Because developing countries differ with respect to their
economic environments, the role of agriculture for development might be re-evaluated in each
specific case. This is in line with the 2008 World Development Report`s message (World Bank
2007), which suggests that in agriculture-based economies, agriculture can be the main engine of
growth, whereas in transforming countries, agriculture is already less important as an economic
activity but is still a major instrument to reduce rural poverty. In urban countries, by contrast,
agriculture plays the same role as other tradable sectors and subsectors with a comparative
advantage can help to generate economic growth.
So far our discussion has mostly considered theoretical models. We now turn to the
empirical investigation of the relation between the agricultural sector and economic growth,
which has a long history. Early contributions by Kuznets, Chenery and others focused on sector
changes accompanying economic development. In 1966, Kuznets observed that as economies
develop, the share of agriculture in output and employment diminishes, which later empirical
data have reconfirmed. Other important early contributions include Chenery and Syrquin (1975),
who combined cross-section and time-series data over 1950 ­ 1970.
More recently, Timmer (2002) used a panel of 65 developing countries over 1960 ­ 1985
to show a positive correlation between growth in agricultural GDP and its lagged values and
nonagricultural GDP growth. He suggests that this correlation can be explained by first-order
effects of agricultural growth on lower food prices, labor migration and capital flows from
agriculture, as well as second-order effects such as improved nutritional intake, which
improves workers` productivity. Similarly, Self and Grabowksi (2007) established a positive
relation between different measures of agricultural productivity and average growth of real GDP
per capita over 1960 ­ 1995 for a cross-section of countries. However, on the basis of panel data
from 52 developing countries during 1980-2001, Gardner (2005) concluded that agriculture does
not seem to be a primary force behind growth in national GDP per capita.
The recent empirical literature considers that the effect of agricultural progress on
poverty alleviation is highly positive. Mellor (2001) goes as far as arguing that it is not economic
9
growth in general that reduces poverty in developing countries, but the direct and indirect effects
of growth in agriculture. In their study of poverty in India over a 35-year period, Datt and
Ravallion (1996, 1998) find that higher farm productivity reduces both absolute as well as
relative poverty. This is partly due to a direct channel of higher household income operating in
the short run and partly due to indirect channels, such as higher wages and lower food prices in
the longer run. Other empirical studies also suggest that these are the main channels and not
labor migration from agriculture into other sectors. This strengthens the argument for supporting
agricultural growth.6 Similarly, Loayza and Raddatz (2010) show for a cross-section of
developing countries that growth in more labor-intensive sectors such as agriculture has a larger
impact on poverty reduction than less labor-intensive activities. Christiansen and Demery (2007)
estimate that 1 percent per capita agricultural growth reduces poverty 1.6 times more than the
same growth in industry and three times more than growth in the service sector. Case studies
confirm these cross-country findings. For example, Dercon and Christiaensen (2005) estimate
that among 15 villages in Ethiopia consumption per adult equivalent is 8.5 percentage points
higher if households use fertilizers, i.e., inputs to increase farm productivity. Another channel
through which agricultural growth can reduce poverty is employment generation in the non-
agricultural sector. Mellor (2001) finds that this effect is mostly driven by increased consumption
demand and not so much by production linkages. Hence, it can be said that agricultural growth is
a central instrument in helping the poor in developing countries.
However, although these empirical investigations establish correlation between
agriculture and GDP growth, they do not imply causation in either direction. The correlation
observed could be spurious if both sectors have been growing independently from each other or
as a result of a common third factor. As a result, studies that have argued a causal effect of
agricultural growth on economic growth have been criticized. To address this issue of
endogeneity in empirical work, Tiffin and Irz (2006) use Granger causality tests to establish that
agricultural value added per worker has a positive effect on GDP per capita in developing
countries. Bravo-Ortega and Lederman (2005) also employ panel data tools such as GMM and
Granger causality tests to re-estimate the effect of agricultural growth on the overall growth rate.
6
The 2008 World Development Report suggests that the recent reduction in rural areas in developing countries has
been driven by improvements in conditions in rural areas rather than by migration to urban areas (World Bank
2007).
10
Using 1960-200 panel data, they find that an increase in agricultural GDP raises non-agricultural
GDP in developing countries, whereas a reverse relation exists for developed countries. The
authors suggest that there exist regional differences of the positive relation in developing
countries, where the effect is higher in non-Latin American and Caribbean countries.
An additional problem that arises with cross-country studies is that differences in country
conditions do not allow for a general relationship between agricultural and aggregate economic
growth. Factors such as openness to trade could alter the relation between agriculture and non-
agriculture. Global markets can be a substitute for what Timmer (2002) calls first-order effects of
agricultural growth (because they provide international capital flows and food imports). This
might explain the different magnitudes of the positive relation found by Bravo-Ortega and
Lederman (2005) for Latin America compared with other regions. Hence, the importance of
linkages between the agricultural sector and the rest of the economy differs across countries.
Some authors have tried to shed light on the importance of such linkages in different developing
countries. As shown by de Janvry and Sadoulet (2009b) for China over 1980 ­ 2001, a 1 percent
agricultural growth had an effect on aggregate growth of 0.45 percent, whereas the indirect effect
through the non-agricultural sector represents half this effect. In line with Mellor`s findings for
non-agricultural employment, multipliers from agriculture to the rest of the economy have been
mainly driven by consumption linkages (Thirtle et al. 2003, Tiffin and Irz 2006).
Agriculture and the Urban Bias
Probably the most important contribution to development made by the agricultural sector
in poor countries in the past has been to provide the savings, i.e., the surplus--extracted through
various means--over and above what is required for the reproduction of agricultural producers,
which allowed industrialization to take place. The tax and price policies that are necessary to
bring about surplus extraction have been extensively discussed in the literature (see Sah and
Stiglitz 1984, Carter 1986). They were made famous by the policy discussions between
Preobazhensky and Bukharin during the 1920s about the so-called primitive forms of socialist
accumulation in the Soviet Union where farmers faced artificially low prices for their output and
punitive taxation throughout the 1920s and 1930s (Conquest 1987). Consistent with these early
models of agriculture as a sector generating a surplus that can be extracted for the benefit of
industry, in the recent past, governments in developing countries have imposed a heavy burden
11
on agriculture by implementing urban-biased policies. A World Bank multi-country study led by
Anne Krueger, Maurice Schiff and Alberto Valdès provides empirical support for the view that
price policy, trade policy and exchange rate policy in virtually all developing countries have
discriminated against agriculture, either directly through food subsidies or taxes on agricultural
exports, or indirectly through manufacturing protection and exchange rate overvaluation. Over
1960 ­ 1984, these policies extracted an average of 46 percent of agricultural GDP from this
sector in 18 developing countries (Krueger, Schiff and Valdes 1998). This massive study
confirmed the hypothesis of T.W. Schultz who, in his famous 1964 book Transforming
Traditional Agriculture, argued that peasants in poor countries were not backward and
traditional, but, on the contrary, rational decision-makers who maximized the return from their
resources. Their apparent unwillingness to innovate, he argued, was rational because
governments of developing countries often set artificially low prices on their crops and taxed
them heavily. In other words, peasants respond to incentives.
The Krueger, Schiff and Valdès study was recently updated, under the direction of Kym
Anderson. The new study reaches similar conclusions but shows that, since the mid-1980s, the
inter-sector bias against agriculture and the antitrade bias have been substantially reduced
(Anderson 2009). Many developing countries have undertaken a great deal of policy reform and
opened to trade and benefited proportionately more (relative to GDP) than high-income
economies from those trade-related policy reforms. Developing countries would gain nearly
twice as much as richer economies by completing the reform process ­ with 72 percent of those
prospective gains to developing countries coming from agricultural and food policy reform. In
developing countries, net farm income (agricultural value added) is estimated to have been 5
percent higher in 2004 than it would have been without the reforms since the mid-1980s. And if
policies remaining in 2004 were removed, net farm income would rise by another 6 percent (far
more than the proportional gain to nonagricultural households). These reforms could further
alleviate global inequality and poverty, since three-quarters of the world`s extreme poor are in
farm households in developing countries. One way to look at policy changes over the past 25
years would be to say that developing countries follow the example of higher-income countries
in moving from anti to pro-farmer policies as they develop. The Anderson study shows that
import-competing farmers in developing countries are being increasingly protected over time.
12
Agricultural production has been directly supported by subsidies to farm inputs such as
fertilizers and irrigation in many developing countries, such as India. Such policies generally
benefit more large farmers than smallholders (de Gorter and Swinnen 2002). Bezemer and
Headey (2008) argue that public policies that actively support agriculture, such as pricing or
support to agricultural research and extension, are a necessary prerequisite for agricultural
growth and that agricultural market liberalization has not benefited small farmers due to market
failures and distortions.
Asia`s Green Revolution was supported by government interventions sustained for long
periods, such as fertilizer subsidies that reduced prices to 25 percent of their world market price.
Indonesia`s rice growth of 5 percent over 1970 ­ 1988, for example, was mainly been achieved
by government pricing, research and investments in the rice sector (Gonzales et al. 1993). But
such public large-scale interventions put a heavy burden on government budgets, are not a good
use of public funds and are not sustainable over time. They also have other detrimental effects.
For instance the subsidization of fertilizer in Asia has led to misuse and soil degradation.
Hence, although urban biases seem to be detrimental for agricultural growth by fostering
industry, agricultural market interventions such as input subsidies or price support are costly and
lead to mismanagement of resources. The liberalization of the market for agricultural outputs,
while it does not impose a bias on either sector, can affect the competitiveness of smallholders.
The Foundations of Agricultural Growth
Having reviewed the role that agriculture can play in economic development, we now
look at the performance of the agricultural sector in different regions of the world, the
foundations of agricultural growth and the challenges faced by farmers in developing countries
today that might diminish the returns to agricultural technologies. These include the structure of
agricultural production, environmental factors, and barriers to technology adoption.
Green Revolution and Technology Adoption
Between 1980 and 2004, the agricultural sector grew at an average rate of 2.6 percent
worldwide, with two-thirds of this growth contributed by Asian economies. Agricultural yields in
Asia increased at an average rate of 2.8 percent between 1961 and 2004, an outcome largely
13
explained by the adoption of high-yielding varieties and the intensive use of fertilizer. In Sub-
Saharan Africa, the average rate of agricultural growth was 3 percent over the same period but
growth per capita of the agricultural population (a broad measure of agricultural income) was 0.9
percent, less than half the growth rate in other regions. Moreover, whereas agricultural growth
during the Green Revolution in Asia was driven by intensification, agriculture in Sub-Saharan
Africa has been growing mostly as a response to land expansion and yields have been stagnant.
Since the potential for land expansion will soon be exhausted, further agricultural growth will
have to come from increased yields.7 What needs to be done in order to achieve higher yields
and, hence, agricultural growth in Sub-Saharan Africa? 8
The consensus about the need for a Green Revolution for Africa is universal but the
characteristics of the African continent call for a different approach to the transformation of
agriculture. In comparison with Asia, Africa is heterogeneous in terms of agro-ecological
conditions, farming systems and types of crops planted. The FAO considers that there are 14
main farming systems in Sub-Saharan Africa. They depend rather weakly on rice or wheat,
which have been the drivers of the Asian Green Revolution. Moreover, most agriculture is rain-
fed (de Janvry and Sadoulet 2009a) whereas the Green Revolution in Asia was partly driven by
intensive irrigation. In fact, only 4 percent of crop area in Africa is irrigated, versus 34 percent in
Asia. Another factor that makes the Sub-Saharan African context different is the
underdevelopment of infrastructure, which hinders market access and leads to high transportation
costs. As a consequence of the heterogeneity across Sub-Saharan Africa, several geographically
separate revolutions will have to take place, in contrast to the Asian Green Revolution, which
was based on wheat and rice (Staatz and Dembele 2007).
In order to understand past developments in agriculture and predict future ones, the
mechanisms behind agricultural development and growth must be identified. Schultz (1964)
formulated the idea that peasants are rational decision-makers maximizing the returns from the
resources at their command and responding to incentives. Many of them remain poor not because
they are backward but because their government provides them with few technical and
7
The source of agricultural growth also matters for its impact on poverty reduction. Agricultural growth in East Asia
has been achieved with technologies increasing labor productivity and has led to large reductions in poverty. By
contrast, in Africa, where labor productivity gains in agriculture have been small and most growth has come from
land expansion, poverty reduction has also been low (de Janvry and Sadoulet 2009b).
8
This discussion owes much to Binswanger-Mkhize and McCalla (2010). Numbers are from the 2008 World
Development Report.
14
economic opportunities. Schultz stressed the importance of making inputs available to farmers
(and increasing the capacity of industry to supply these inputs), generating new locally specific
knowledge, and improving education about new seeds and technologies via extension services.
Schultz`s model did not specify which institutions could influence this process and facilitate the
adoption of new technologies by farmers. This shortcoming was addressed by Hayami and
Ruttan (1971, 1985), who developed a model of induced innovation to explain the factor bias of
technological change. The causal sequence begins with changes in relative factor scarcities
leading to changes in relative factor prices (under the assumption that markets actually exist and
work). Prices, in turn, guide technological advances toward saving on the factors that become
relatively more expensive. Since agricultural research is largely a public good, the government is
the entity that needs to respond to market signals and factor endowments by allocating funds to
alternative research programs. This occurs partly in response to producer demands for
technologies that allow them to save on the factors that are becoming relatively more expensive
and partly as a response to changing recourse constraints, such as the current environmental
challenges described below. In comparing the long-run history of technological change in
Japanese and US agriculture, for instance, Hayami and Ruttan found that, in labor-abundant but
land-scarce Japan, technology has been mainly land-saving, allowing for rapid increase in the
productivity of land. In the United States, where land was abundant and labor scarce, technology
was mainly labor-saving and allowed rapid increases in the productivity of labor (see Ruttan
1998, 2002).
Agricultural R&D and Appropriate Technologies
Identifying the characteristics of agriculture in Africa does not explain why yields are
low. There are two broad problems. The first one is lack of appropriate technology and the
second is lack of adoption. Whereas the former calls for better targeting of research to African
countries and their conditions, the latter demands a reduction of the barriers to technology
adoption. Of course, the problem of low yields can also be a combination of both inappropriate
technology and barriers to adoption.
Agricultural R&D and its capacity to produce more productive technologies are at the
heart of long-run agricultural growth. Such new technologies triggered the Green Revolution in
Asia, and in light of the limited potential for land expansion in Sub-Saharan Africa such
15
inventions are also strongly needed for African farmers. Due to the heterogeneity of the countries
and differences with, say, Asian countries, crops that have been planted in other regions might
not be appropriate for Africa. Technological spillovers from high-income countries to low-
income African countries are unlikely. Moreover, regional differences are large within the
continent and prevent technology spillovers among African countries (Pardey et al. 2007). The
slow growth in yields can be partly explained by the slow introduction of suitable high-yield
varieties during the 1980s and 1990s (Everson and Gollin 2003). This seems to be changing
recently as a consequence of better targeting of international research directly at the
subcontinent. In 2006, for example, the CGIAR spent 48 percent of its total budget on activities
directly related to Sub-Saharan Africa. But the contribution of CGIAR research to total yield
growth has been much smaller in Sub-Saharan Africa than in other regions. Yield growth itself
has been much lower in Sub-Saharan Africa than in other regions due to lower adoption rates and
lower use of fertilizers and other inputs, although new varieties have been introduced
(Binswanger-Mkhize and McCalla 2010).
The heterogeneity of African countries calls for less reliance on international research
and more on regional and domestic research; but expenditure on agricultural research in Africa is
low and this has also contributed to stagnating yields (Binswanger-Mkhize and McCalla 2010).
Public expenditure on agricultural research grew only by 1 percent during the 1990s (some
countries have even seen negative growth). Around 40 percent of total agricultural research
spending comes from donors and private agricultural research is very limited in Sub-Saharan
Africa. In 2000, it contributed only 2 percent to overall research investment (Beintema and Stads
2008). In stark contrast to these low spending numbers, the number of agricultural researchers in
Sub-Saharan Africa is 50 percent higher than in India and 30 percent higher than in the United
States. But these researchers have less training than those in other regions of the world. Spending
per researcher is much lower in Sub-Saharan Africa than in India or the United States, and lower
compared with its past value. In real terms, it is now less than 50 percent of its level in 1981
(Pardey et al. 2007). Universities have not been integrated into national agricultural research
systems (Staatz and Dembele 2007). Although international research organizations such as the
CGIAR have shifted to more regional approaches and collaborations with national agricultural
research organizations, universities seem to have been neglected, although they employ more
PhD degree holders than other research organizations.
16
Future research will need to have a regional focus and target specific needs. In fact, many
regional initiatives have already been established. The New Partnership for African Development
emphasizes heavily the role of agricultural R&D. Another important form of regionalization is
participatory plant breeding, which supports especially the needs of smallholders. According to
Ceccarelli and Grando (2007), this approach is different from normal plant breeding on stations
in three ways: the testing and selection of seeds take place on the farm, the farmers are involved
in the decision making, and it can be implemented at many different locations. The participation
of farmers is expected to increase the rate of adoption of new seeds.
An important agricultural R&D question is what recent biotechnology advances can do
for African agriculture and if it is the route to the continent`s Green Revolution. Poor farmers
might especially benefit from transgenic food crops because they are particularly disease-
resistant. Estimations by Edmeades and Smale (2006) show that transgenic bananas would be
mostly adopted by poor, subsistence-oriented farmers and are therefore a pro-poor variety. So
far, however, transgenic crops are grown commercially only in South Africa (Eicher et al. 2006),
where in 2006 transgenic white maize covered 44 percent of the total white maize area (World
Bank 2007).
Although there is a broad consensus that biotechnology could be a driving force behind
Africa`s Green Revolution, several constraints have prevented its fast adoption so far. Until now,
the private sector has done most of the research on transgenics and it does not necessarily suit the
interests of poor farmers. Since private agricultural research plays only a very limited role in
Africa, to promote broad adoption of transgenic crops, public research would have to adopt a
stronger focus toward these new technologies. But strong intellectual property rights on existing
technology could deter public research efforts. Another hurdle is the absence of biosafety
regulations. Weak regulatory capacity in developing countries slows these processes (World
Bank 2007). Many African policy makers are skeptical about biotechnology as a result of
European consumers` concerns about health and environmental issues. Eicher et al. (2006)
conclude that transgenic crops will be available for use by smallholders only in 10 to 15 years.
17
Extension Services as a Means to Foster Adoption
Even if new and more productive technologies are available, farmers might lack
information about their existence and knowledge about proper implementation techniques.
Extension services are educational devices that are meant to teach and provide information,
enabling farmers to use and effectively manage new technology. These services have been used
as a means to diffuse new technology in developing countries since the Second World War.
Extension services also include related services, such as health and nutrition services. When they
began after World War II, extension services mostly included education about new technologies,
as well as input and credit provision (Birkhaeuser et al. 1991). However, most field staff lacked
the necessary technical training and field experience to effectively deliver the services to
farmers. During the 1970s, a new approach--mainly driven by the World Bank--called the
training and visit (T&V) approach began to spread. It included, in addition to teaching farmers
about new technologies, obtaining their feedback about the problems they encountered. The
feedback was forwarded to supervisors who were then supposed to solve such problems.
Extension staff meets with only a limited number of contact farmers on a regular schedule. The
cost of the new system, because of its greater staff requirements, was very high and this made it
unsustainable. Anderson and Feder (2007) suggest that the impact of extension services has been
rather mixed, with some projects having very high returns to investment and others only
negligible success. A general problem with the T&V approach is that extension agents--who are
civil servants--often lack accountability.
As described in two excellent review papers--Anderson and Feder (2007) and Alex et al.
(2002)--the decentralization of the system, putting farmer groups or the private sector in charge
of service provision, has been the response proposed to overcome these accountability problems.
Farmer groups can in fact engage on both sides of the market for extension services. On the
demand side, they can increase overall demand for information because they reach more farmers
and can negotiate for their demands more successfully. On the supply side of the market, they
can deliver services to their members and finance them.
In addition to increasing accountability and quality of service provision, privatizing
extension services has also reduced the financial burden on the public sector and made services
more financially sustainable. Nevertheless, globally only 5 percent of extension services are
18
provided by the private sector. Private extension services could respond better to demands from
commercialized farmers but smallholders might be unaware of their own needs, unable to
articulate them, and unable to afford services. Therefore, they might demand fewer services than
they need. In this situation, provision by only the private sector to different group of farmers
might not be the best solution. A better approach in this case would be a private-public
partnership to provide services as well as a publicly funded but privately managed system. This
would increase the efficiency of the system and cater to all groups of farmers.
The environment in which farmers operate today is changing and requires new ways to
provide extension services. A recent idea is the introduction of information and communication
technologies (ICTs) into extension services and rural development projects in general. ICTs can
deliver information that is important for the development of rural areas in the long term (such as
education) and in the short run (such as market information). For example, ICTs can be used for
long-distance learning programs and thereby help to accumulate human capital. They can
provide information on weather, price and profitable income diversification possibilities
(Chapman and Slaymaker 2002). An important technology is cell phones, which can improve
both private as well as public information. With mobile phones, agricultural extension services
can be supplied at a lower cost and higher quality information can be provided. For example,
increased mobile phone coverage has increased the efficiency of local markets in Niger (Aker
2010a,b).
Environmental Challenges
The need for agricultural R&D and extension services is not new and their impact has
been witnessed in Asia in the past. However, any agricultural revolution today will face
environmental constraints that were not considered during the Green Revolution. The issue of
the sustainability of agricultural systems is now high on the agenda and the preservation of
ecosystems and biodiversity will be important for the potential of agriculture in the future. Most
African yield increases have been achieved through expanding land under cultivation, which has
led to deforestation and land degradation. Soil degradation can have a negative impact on the
future productivity of land. In the highlands of Ethiopia, these negative effects have been so
strong as to offset any gains from technological progress. In extensive areas, more intensive
production can help establish a sustainable system. But since Africa`s agricultural revolution will
19
have to come from increased use of inputs, intensification will need to be sustainable over time
both economically and ecologically. African farmers have used low levels of fertilizers
compared with farmers in other developing countries. Although some authors (e.g., Marenya and
Barrett 2007) argue that once land is degraded, fertilizer will be ineffective, Matsumoto and
Yamano (2009) do not find a diminishing yield effect of fertilizers as soil fertility decreases.
Reardon et al. (1999) suggest that intensification will have to be capital-led instead of
being accomplished by employing more labor, and that abstaining from using fertilizers and
other non-labor inputs can lead to soil mining and is hardly profitable. But capital-led
intensification of agricultural production has its own negative environmental effects and has to
be properly managed to be sustainable. Inappropriate use of fertilizers can, for example, lead to
poisoning of humans and animals and water pollution, which in turn can have indirect
consequences for larger ecosystems. Such negative effects have been observed in rice-wheat
systems in South Asia (World Bank 2007). Hence, what is called for is well managed, capital-led
intensification of agriculture, taking into account agro-ecological factors and avoiding
environmental damage--what Conway and Toenniessen (2003) call the Doubly Green
Revolution.
Global climate change will also have to be taken into account. Increasing global
temperatures could lead to a drop in agricultural output mostly in tropical countries; and less
rainfall could damage rain-fed agriculture and cause more frequent droughts. This is a special
concern for Sub-Saharan Africa where most agriculture is rain-fed, so that climate change
implies an increased risk for farmers. Compared with a no-climate-change scenario, agricultural
GDP in Sub-Saharan Africa could decline by 2 to 9 percent. Adapting to the changing climate is,
hence, a necessity for African farmers. New crop varieties that are more drought resistant and
greater investment in irrigation systems are needed (World Bank 2007). Such adaption efforts
should be part of the overall agricultural development strategies. Thanks to agricultural R&D,
new technologies to cope with climate change already exist; but many households in Africa do
not adjust their planting techniques (World Bank 2007). This is partly due to various barriers to
adoption, an issue we now address.
20
Barriers to Technology Adoption
Despite some adoption of new crop varieties in Africa, adoption rates remain far below
Asian rates. For example, in 2000, African adoption rates of modern varieties of rice, wheat and
maize per area harvested were less than half those of rates in East and Southeast Asia (Gollin et
al. 2005). To understand low adoption rates of new technologies, one needs to keep in mind the
factors that determine a farmer`s adoption behavior. While low adoption rates might seem
irrational when looking at promised yields, they may well be a result of rational decision making
by farmers given the various constraints they face (Brooks 2010). Technology adoption in
general is positively related to a farmer`s schooling and wealth and the adoption of the same
technology by neighbors (Foster and Rosenzweig 2010a). Although this does not establish
causality, it suggests that low education, missing credit markets and externalities could be major
barriers to technology adoption.
The channel through which education can affect technology is learning. Higher levels of
education increase the return to experience with a new technology, which makes a technology
profitable after a shorter period of time for more educated farmers. Foster and Rosenzweig
(2010a) find that, in India, the returns to previous planting of high-yield variety seeds are higher
for educated than for illiterate farmers. The potential to learn about new technologies depends
also on the available information about new technologies and their profitability. Extension and
other services can ­ if properly implemented as discussed above ­ deliver the information a
farmer needs to profitably adopt a new technology. Access to market or weather information is
also important for producers. For example, Goyal (2010) finds that an Internet kiosk providing
prices as well as a new marketing channel to soy farmers in India increased the share of soy
cultivated area and concludes that improved information leads to higher returns. Weather
information is important for adopting to climate change today. A program initiated in Mali in
1982 helped farmers to better control climate risk by providing timely weather information
(World Bank 2007). The introduction of ICT is also closely related to the issue of learning and
can facilitate and enhance the distribution of important information (Byerlee et al. 2010).
Another barrier to adoption is the lack of well functioning credit markets. If new
technologies require initial investment, farmers who lack sufficient funds and cannot take out
loans might be unable to adopt the technology even if it is highly profitable to them.
21
Croppenstedt et al. (2003) find that credit constraints in Ethiopia severely restrict fertilizer
adoption by farmers. Farmers` lack of collateral may be the cause of their restricted access to
loans. Property rights for land can therefore be an important determinant of adoption. And, as
discussed below in the section on land tenure, property rights are important for farmers`
incentives to plant new varieties.
Risk and uncertainty about yields--especially high when a new technology is adopted--
can also lead to low rates of adoption. Poor farmers often do not have assets they can rely on in
case of low output (Jack 2009). Hence, incomplete or missing insurance markets represent an
additional barrier to technology adoption for poor farmers. Dercon and Christiaensen (2007)
show that downward consumption risk due to harvest failure reduces the adoption of fertilizers
by farmers in Ethiopia. If the adoption of a new technology generates positive externalities for
other farmers, this can reduce a farmer`s incentives to be the first to adopt a new technology,
especially if initial returns are expected to be negative (Jack 2009). Such externalities can lead to
strategic adoption delay.
Finally one last major factor that can be a barrier to technology adoption is the lack of
appropriate infrastructure, which is certainly the case in Sub-Saharan Africa (Foster and Briceño
2010). More than 30 percent of the rural population in Sub-Saharan Africa has poor access to
markets, whereas this is the case for only 5 percent in South Asia (World Bank 2007). Rural
roads and transport are under-developed mainly because of the low population density and other
factors, giving rise to high transportation cost. In fact, lacking infrastructure drives up the price
of fertilizer and other inputs, and this makes them too expensive for farmers to use. For
example, Suri (2009) finds that farmers in Kenya, who have high potential returns to hybrid
maize, do not adopt it due to the high cost of seeds and fertilizers caused by infrastructure
constraints. Similarly, Matsumo and Yamano (2009) estimate that the very low use of fertilizer
in Uganda is not profitable due to the high relative price of fertilizers. Moreover, they show that
not only do high relative prices discourage the use of fertilizers, high prices also discourage the
adoption of high-yield variety maize, which requires fertilizer as a complementary input.
The examples of adoption barriers, especially in Sub-Saharan Africa, stress that even if
appropriate technologies do exist, poor farmers might not benefit from them. Therefore,
22
eliminating such barriers and providing farmers with better access to inputs must be an integral
part of today`s agriculture for development agenda.
Farm Size and Land Tenure
Many farmers in developing countries operate on a small scale. Increasing farm size is
key for improved incomes in agriculture because it allows for the use of mechanization that has
indivisibilities (with differences in access to credit by small and large farms favoring the latter),
implying increasing returns to scale and higher profitability per hectare. In a detailed empirical
paper, Foster and Rosenzweig (2010b) show that this is the case today in India, where most
farms are too small to exploit the productivity and cost-saving advantages from mechanization.
But land consolidation in larger farms with continued population growth and limited long-
distance migration requires vigorous employment creation in the rural non-farm economy,
basically in secondary towns and cities. Agriculture-for-development strategies need to focus on
the smallholder sector, understand the challenges they face and find ways to make them more
productive (World Bank 2007).
Much of the early discussion on smallholders revolved around the issue of efficiency of
farm scale. Whereas there are potential economies of scale on large farms,9 small farms have
often been seen by family-farm theories as more efficient because they do not bear the cost of
labor supervision and there are no moral hazard issues. Many developing country studies have
found an inverse relation between farm size and land productivity even after controlling for other
productivity determinants, such as land quality (Eastwood et al. 2010). However, in the presence
of market failures, large farms can have an advantage over small farms. For example, they might
be more able to take out loans and hence face lower capital costs. This would suggest a U-shaped
relation between farm size and productivity (Chavas 2001). Moreover, even if economies of
scale in production are outweighed by the labor costs borne by large firms, economies of scale in
9
In the past there were no inherent economies of scale in agriculture other than for plantation crops but new sources
of economies of scale have emerged. They originate in technological change (new technologies such as zero tillage
and genetically modified organisms, new management techniques, precision farming), new markets (product
certification due to demanding sanitary and phyto-sanitary standards, contracts with supermarket chains for
continuous and uniform deliveries), institutional changes (access to international finance and re-insurance) and
public-private partnerships in the provision of public goods (infrastructure for access to low populated areas and
opening of new lands). See Byerlee, de Janvry and Sadoulet (2010).
23
processing could render smaller farms less competitive (Binswanger et al. 1995). In addition,
recent technology advances, such as zero tillage, render the supervision cost advantages of
smallholders irrelevant. If smallholder disadvantages are based on market failures (and not
diseconomies), an effort can be made to eliminate such biases against small farmers to reinforce
their competitiveness in the market (Byerlee de Janvry and Sadoulet 2010).
New developments in the agri-business and food sector might shift the competitive
advantage to large-scale producers and make it difficult for smallholders to participate actively in
food markets. Two developments are of special importance: the supermarket revolution, and
standards and certification. The wave of new supermarkets in developing countries has led to
new procurement systems (Eastwood et al. 2010). Supermarkets usually demand standardized
products in large quantities, which can put small farmers at a competitive disadvantage. Indeed,
as reviewed in Reardon et al. (2009), supermarkets seem to favor large over small suppliers if
they have the choice between them. However, some supermarkets prefer to source from small
farmers as large farms have more market options and are perceived to be more risky suppliers
than smaller farms. If the latter are included in the supermarket chain, however, non-land assets,
such as irrigation or access to transportation infrastructure, are usually a prerequisite. Where
supermarkets can only source from small farms, they have also provided resources such as
equipment and technical assistance to contracted farmers. Hence, vertical coordination can also
be beneficial for smallholders. In addition, new private standards for products and processes put
small farmers at a disadvantage, as validation and certification of have economies of scale
(Hazell et al. 2006). In order to help smallholders face these new challenges and include them in
modern value chains, coordination among participants has to be improved. This could be
initiated by the public sector as well as by the private sector through producer cooperatives, for
example. Foster and Rosenzweig (2010b) propose a different solution. They suggest that in the
light of today`s mechanization of production, Indian farmers are too small to be competitive and
land consolidation paired with increased employment opportunities in the rural non-farm sector ­
an issue addressed in more detail below ­ are necessary to increase incomes from agriculture.
It is not only farm size, however, that matters for efficiency of farm production. Property
and user rights are also determinants of agricultural productivity. Different tenancy arrangements
exist in developing countries. Tenants either pay a fixed rent for land use or engage in
24
sharecropping, transferring part of their harvest to the landlord. When it comes to efficiency, the
question to ask is which arrangements lead to a less skewed land-use distribution and increase
productivity. The extent to which fixed-rent and sharecropping are to be preferred over one
another depends on the degree of asymmetric information between farmer and landlord.10 Under
perfect enforceability of effort, fixed-rent and sharecropping contracts should lead to the same
productivity for a given farmer. But moral hazard can reduce the effort of the tenant under a
share-cropping contract if the effort is not directly observable and contractible. Therefore, in
terms of effort, fixed-rent contracts are preferred. If tenants are risk-averse, they might be
unwilling to enter into a fixed-rent contract because the risk burden of a bad harvest would be
completely shifted to them. In this case, sharecropping is the second-best solution in terms of
efficiency. Empirical studies show that even if share-cropping reduces productivity compared
with fixed-rent contracts, adjusting for the land quality of shared plots, the loss is small (Otsuka
and Hayami 1988). One way landlords try to induce higher effort levels by tenants in
sharecropping arrangements is interlinked contracts in which the landlord supplies credit and
inputs to the tenant. For example, if the landlord provides cheaper credits while at the same time
claiming a higher output share, tenants might be encouraged to borrow more. If the consequences
of default are severe, higher borrowing will induce them to employ higher effort (Braverman and
Stiglitz 1982). Another explanation for such interlinked contracts is credit constraints faced by
the tenant (World Bank 2003). Laffont and Matoussi (1995), for example, find a positive relation
between the tenant`s own working capital and her crop share.
In Asia and Latin America, tenancy usually reduces farm size (Eastwood et al. 2010).
Mearns (1999) shows that in India plot fragmentation is reduced, which increases productivity by
reducing costs of production. In terms of tenancy reforms that try to strengthen tenants` rights,
Besley and Burgess (2000) find that in India such tenancy reform is negatively related to
agricultural productivity. However, Ghatak and Roy (2007) disaggregate the analysis to the
regional level in India and conclude that in West Bengal, where the reform was implemented
rigorously, there has been a positive relation between tenancy and productivity. They do not,
however, find any effect on land distribution. Despite such positive findings, tenancy regulation
10
Binswanger et al. (1995) contains a detailed discussion.
25
in favor of tenants can also lead to eviction of tenants and self-cultivation by less efficient
landlords (Eastwood et al. 2010).
How have land tenure reforms that have been pursued in many developing countries
affected both farm size and productivity? The success of land reforms in the past has been
mixed, for both economic and political reasons (de Janvry 1981). Binswanger et al. (1995) argue
that land reforms can redistribute land from large, less efficient units to smaller, more productive
farmers, and that fixed-rent or shared tenancy contracts should be preferred to large farms.
Titling of land can increase productivity in the agricultural sector if it increases investment
incentives or relaxes credit constraints for landholders. Feder (1993) shows that in Thailand titled
land has been more productive than untitled land; but Place and Hazell (1993) do not find a
positive relation between rights and productivity among four African countries.
Titling programs can increase land concentration if more powerful individuals can claim
more land or can do so faster. For example, in Bolivia during the 1980s, large farms got their
titles much faster than smaller farmers. Nevertheless, if titling is done properly and concentration
can be avoided, it can increase productivity by relaxing credit constraints for more efficient small
farms. Direct land distribution implemented by imposing ceilings on land holdings seems to have
achieved only little redistribution of land. As suggested by Eastwood et al. (2010), many
redistribution efforts in Latin America left land mostly unreformed due to lack of proper
implementation. Even where land was redistributed, it might not have had a positive effect on
productivity. Mearns (1999) explains that ceilings in India have redistributed land to the poor,
but Ghatak and Roy (2007) find the effect on productivity of this redistribution to be negative.
They suggest that this is the case because redistribution leads to inefficient fragmentation of
plots.
The discussion so far has focused on the efficiency of small farms and the role the latter
can play in agricultural development. The social contribution that small farms can make is a
separate issue. Hazell et al. (2006)--in a long tradition that goes back at least to Jefferson--
argue that small farms can be an alternative for rural households until they can fully exit the
agricultural sector and work in non-farm activities. And, related to the issue of food security,
small farms can guarantee subsistence in rural areas, an issue that is addressed below.
26
The Rural Non-Farm Sector and Rural Development
Income Diversification in Rural Areas
The rural non-farm sector, perceived to be unproductive and of negligible importance,
had in the past received much less attention from governments in the past than, say, the issue of
urban bias (Lanjouw and Lanjouw 1995, 2001). Recent contributions point out that the rural non-
farm sector can serve as a bridge between agricultural-based livelihoods and industrial ones
(Barrett et al. 2010), thereby playing an important role in a country`s structural transformation.
As pointed out above, further agricultural growth will have to come from capital-led
intensification of production, which will limit the capacity of agriculture to employ a constantly
growing rural labor force. Hence, rural and peri-urban sectors will play an important part in
absorbing additional labor in the future. Employment in those sectors is stimulated by agriculture
growth through the production and consumption linkages described above, and is an important
complement to agriculture for rural poverty reduction (de Janvry and Sadoulet 2009b).
The rural non-farm sector--comprising, for example, home production of clothing as
well as wage employment in rural factories--is heterogeneous. Of particular interest when
studying this sector is the emergence of rural towns. As they offer a larger market compared with
rural settlements, they allow rural enterprises to benefit from economies of scale and higher
profits (Hazell and Haggblade 1993). Empirical evidence suggests that such towns have the
potential to generate economic growth. China`s Township and Village Enterprises are a leading
example of this phenomenon (Lanjouw and Lanjouw 1995, 2001).
The most important roles played by the rural non-farm sector are the generation of
employment and income for the rural poor. Many households in rural areas today do not
specialize in either agriculture or non-farm activities but derive their income from multiple
sources. Income diversification plays an important role in the livelihoods of rural populations.
Farmers grow different types of crops during the year. Families derive income from non-farm
rural activities and receive remittances from household members who have migrated. The
literature mentions several reasons why rural households and individuals--as opposed to their
urban counterpart--diversify rather than specialize. Barrett et al. (2001) name four main causes
for income diversification into non-agricultural activities: seasonality in employment
opportunities, diminishing returns to factors of production, market failures and risk management.
27
Due to seasonal variations in returns to labor in farm activities, individuals might work
temporarily in the non-farm sector. Some household members might work off-farm if there are
diminishing returns to labor in agricultural production. Simultaneous income generation from
both farm and non-farm sectors can be a strategy to cope with income risk if appropriate
insurance markets are not available. Engaging in activities independent from agriculture such as
manufactures can counter farm-related risk. Households in Burkina Faso that diversified their
income into non-farm activities were more able to cope with droughts during the 1980s (Webb
and Reardon 1992). Being able to hedge against risk in this way may enable farmers to increase
the adoption of more risky high-return crops (Lanjouw and Lanjouw 1995, 2001). Other market
failures can also explain income diversification. If capital markets do not exist, households
investing in farm equipment will engage in non-farm activities to raise the required capital. Non-
farm income in Burkina Faso increased farm productivity by stimulating the adoption of animal
traction (Savadogo, Reardon and Pietola 1998).11 Missing land markets might prevent
individuals whose comparative advantage is in non-farm employment from fully specializing in
these activities.
Rural non-farm employment is not an option for all rural households. Zezza et al. (2008),
using survey data from 15 developing countries, identify patterns along demographic
characteristics as well as asset possession of households by income source. They conclude that
households are more likely to engage in on-farm work if they own land, have lower levels of
education, have little access to infrastructure and a greater share of their labor force members is
female. Households deriving income from non-agricultural wages are usually more educated and
have better access to infrastructure. Households receiving income from remittances are more
likely to have a female head. Reardon (1997), focusing on African countries, draws similar
conclusions but stresses the fact that households with higher income from non-farm activities
also have higher total income and larger landholdings. This raises the question of causality.
Either income diversification into non-farm activities leads to higher income because they
generate higher returns, or diversifying households are better endowed initially.
11
This argument could, however, also go the other way around. Instead of lacking credit supplies, wealthy farm
households might not be able to find profitable saving opportunities in financial markets and therefore invest in rural
enterprises (Lanjouw 2001).
28
Several empirical studies (e.g., Barrett et al. 2001, Lanjouw and Lanjouw 1995, 2001)
draw similar conclusions. Asset endowments of households determine their ability to diversify
incomes by participating in non-farm activities. One of the most important determinants is the
level of education among household members. Many high-return, non-farm jobs require a certain
amount of human capital, creating barriers for less educated households to take advantage of
such diversifying opportunities. For example, Estudillo and Otsuka (2010) show that secondary
and tertiary education is positively related to non-farm income in the Philippines.
Social capital is another factor explaining the ability of individuals to work off-farm.
Workers who lack strong social networks, such as women or immigrants, have less access to
well-paid non-farm jobs. And limited access to infrastructure can leave households in remote
rural areas unable to participate in non-farm income diversification (Barrett et al. 2001). In
Africa, if access to urban areas is given, migration income becomes more important than non-
farm rural income in the total income of rural households (Reardon 1997). Access to proper
infrastructure is not only important for households to access the non-farm employment sector,
but also for this sector to function properly and be profitable, thereby guaranteeing job
opportunities for rural households. For example, electricity shortages that make the use of
generators necessary can raise costs and reduce profits for rural enterprises (Lanjouw and
Lanjouw 1995, 2001).
Although there are barriers to high remunerative rural jobs, households that are poor in
assets still engage into non-farm work. Lanjouw (2001) shows that there are two types of off-
farm employment in El Salvador, one in which labor productivity and wages are high and
another one that plays the role as a last resort employment for poor households. Whereas the
former can lead to upward income mobility of workers, this is not necessarily the case for the
latter. Lanjouw argues that even low-paying, non-farm jobs support the poor`s income if, for
example, unemployment was the alternative. Himanshu, Lanjouw, Mukhopadhyay, and Murgai
(2010) find that employment growth in the rural non-farm economy is strongly correlated with
growth in neighboring urban centers, and that poverty reduction has occurred partly by
generating employment opportunities for historically disadvantaged rural groups.
Although the literature suggests that richer rural households engage more in higher-
paying non-farm activities, there is still a consensus that diversification improves the incomes of
29
such households and contributes significantly to poverty reduction in rural areas. Evidence from
Africa shows that higher non-farm income leads to faster growth in income and consumption
(Barrett et al. 2001), while evidence from rural Asia shows that household access to non-farm
income is one of the main drivers of poverty reduction (Estudillo and Otsuka 2010). Hence a
well functioning non-farm sector to which poor households have access is, next to agriculture,
important for income generation and poverty reduction in rural areas.
The question that arises for policy is whether agricultural and rural non-farm sector
activities are complementary or substitutes. If, for example, agriculture has little potential in
certain regions (a view consistent with agro-pessimism), policies might need to be more
tailored toward non-farm activities. Both consumption and (upward and downward) production
linkages exist between agriculture and the non-rural sector, although the strength of these
linkages varies across time and space.12 The existence of linkages does not mean that a vibrant
agricultural sector is a necessary condition for a successful non-farm sector. There are examples
of agricultural growth limiting the tradable sector in rural areas--see, e.g., the study by Foster
and Rosenzweig (2003) cited above. But what follows from the existence of linkages between
agriculture and the rural non-farm sector is that policies targeted at one or the other should not be
made in isolation but integrated in an overall framework (Lanjouw 1999). Although the
traditional interpretation of the rural non-farm economy (Mellor 2001, Adelman 1984) was that it
emerged though linkages with agriculture, new empirical studies have opened important new
perspectives for poverty reduction and shown that more attention should be paid to small towns
(as the India study by Himanshu et al. shows). Agricultural growth stimulates the growth of the
rural non-farm economy through forward, backward and final demand linkages, located in rural
areas due to the advantages of proximity to agriculture (Byerlee, de Janvry and Sadoulet 2010).
Changing Approaches to Rural Development
Of 5.5 billion people living in developing countries, 3 billion live in rural areas and 75
percent of today`s poor are rural (World Bank 2007). The rural sector has contributed more than
12
Lanjouw and Lanjouw (1995, 2001) provide quantitative estimates of these linkages.
30
50 percent to global poverty reduction during the past.13 Rural development is of high
importance for poverty reduction as well as for agricultural growth in developing countries.
Rural development, concerned with improving the livelihoods of the rural population and
especially the poor, is broader than agricultural development. Whereas the farm sector is the
focus of the latter, rural households are the main preoccupation of rural development. Rural
development is concerned with household income, resource allocation, poverty, and access to
basic needs such as health, education and food security. The heterogeneity among households in
rural areas with respect to these issues is important for the design of rural development strategies
(de Janvry et al. 2002). Whereas households that derive their main income from farm activities
can benefit from improved agricultural technologies, landless rural households that diversify
toward the non-farm sector would generate greater welfare from policies that improve such
employment opportunities. Agricultural development and rural development are often connected.
This is, for example, where smallholders are important for guaranteeing food security. Rural
development strategies often involve many different actors, such as the state, civil society and
market participants. Defining a new approach toward rural development for today`s developing
world will require defining the roles and importance of the actors in the process. Understanding
the positions they took in past approaches to rural development is an important first step.
Approaches to achieve the goal of rural development have changed significantly over the
past decades.14 During the 1950s and 1960s, community-based rural development strategies, in
which members of communities were given joint responsibility to manage their community
resources, were put in place. UN programs, for example, sent civil servants and experts from
government agencies to support village communities, and the latter were supposed to establish
their own development plans--involving infrastructure, education and agricultural
improvements--while outside experts provided advice and grants. Community development
(CD) was meant to enable cooperation between the state and the rural population. It
decentralized development issues to encourage self-help efforts (Holdcroft 1978). During the
heydays of the Green Revolution during the 1960s, the diffusion of technology to smallholders
by government agencies was considered a key part of rural development. CD was very popular
13
De Janvry and Sadoulet (2009b) estimate that between 45 and 93 percent of worldwide poverty reduction over
1993 ­ 2002 can be attributed to a decrease in rural poverty, depending on the extent to which migration out of rural
areas involves more poor or non-poor individuals. Under the poverty-neutral migration scenario, the contribution is
56 percent.
14
This account follows de Janvry, Sadoulet and Murgai (2002).
31
and, by 1960, 60 countries had started to implement CD programs. But by 1965 many of these
programs had been stopped or reduced. These early attempts at rural development failed because
communities were not given additional resources, old power structures persisted, and traditional
elites prevented the programs from reaching the poor (Holdcroft 1978).
As economic growth in developing countries slowed during the 1970s, it became clear
that it would not trickle down automatically to the poor. The focus of rural development
approaches shifted toward poverty reduction. The leading approach to achieve this goal in rural
areas became Integrated Rural Development (IRD), supported by major donors such as IDA (the
World Bank) and USAID. The programs had twin objectives: improving agricultural
productivity and satisfying basic needs through health or education services (Staatz and Eicher
1978). Compared with the former CD approach, IRD was intended to focus directly on the poor.
Again, the state played the central role in delivering public goods as well as subsidized inputs,
credit or extension services. In the aggregate, IRD programs were not successful. For example,
Lele (1975), who reviewed 17 projects in Africa, concluded that the main reason was that they
did not incorporate local technical expertise, did not emphasize local institutions, and did not
understand the constraints faced by small farmers. Moreover, most projects were too costly to be
sustainable beyond the pilot phase. Other factors that led to the disappointing performance of
IRD programs were the urban bias of price policies, the lack of access to land and other assets,
and the lack of participation in the projects by beneficiaries. The support for IRD--both by
governments and by major donors like the World Bank--decreased sharply in the early 1980s.
These donors shifted their focus to extension, roads or education projects--these had previously
been specific rural development areas and they were now dealt with in isolation (Binswanger
1998).
During the 1980s, rural development approaches also shifted toward more market
oriented solutions and public interventions in rural areas diminished--in line with the neo-
liberal belief that free-market forces would eliminate distortions and reduce poverty. It soon
became clear that smallholders were not in a position to adapt to the new market rules and the
de-institutionalization of the agricultural sector contributed to the fact that smallholders were
falling behind. The private provision of services could not easily replace their public provision
due to the smallness of markets and information failures. Moreover, there were many market
failures in developing countries, in particular in credit and insurance markets, and missing
32
markets can be a major barrier preventing smallholders from adopting new technology and
internalizing the benefits.
Failed attempts at rural development, which relied heavily either on state involvement or
on market forces, raise the question of the respective roles the government and the market should
play in rural development today. The limited success of market liberalization has been partly
attributed to weak institutions that are essential for markets to work, such as clearly defined
property rights and legal institutions that allow contracts to be enforced (Dorward et al. 2005).
Therefore, one role for the state is to strengthen such institutions. Second, the state has to supply
public goods such as R&D for agriculture, basic education or rural roads (World Bank 2007).
Private expenditure for agricultural R&D is very low in developing countries and public
provision of research and extension services is essential if innovative new technologies are to
reach smallholders in developing countries. Education and access to employment opportunities
are important prerequisites for successful income diversification in rural areas and should be
available to rural households. Appropriate infrastructure and functioning markets are also
important for rural non-farm sectors to emerge. This does not necessarily mean that public good
projects have to be carried out by the state; but it means that the state must take the initiative,
provide incentives for their provision and regulate the providers. Public-private partnerships, in
which projects are publicly financed but provided by the private sector, can increase the
efficiency of public good provision--although they can also lead to high public spending (Engel,
Fischer and Galetovic 2008). Third, specifically targeted safety net policies to address the
various risks faced by the vulnerable rural poor are also an important task for the state. Such
programs can involve cash transfers or work-for-food programs (de Janvry et al. 2002). Fourth,
markets can be inefficient because agents are disconnected because they lack transportation and
communication infrastructure or complementary investments are not undertaken by other agents
in the supply chain (World Bank 2007). This has been one of the reasons why market
liberalization has often not been successful. Hence, a possible role for the state is help to
overcome such coordination failures between different actors in the rural economy. Investments
might be targeted at communication and information systems, supporting farmer associations,
input or credit subsidies or extension services (Kydd and Dorward 2004).
33
Governance is important for rural development policies to succeed (Dethier 1999).
Political and social conflicts can be major impediments to development efforts. Moreover,
decentralizing governance and empowerment might be important for successful rural
development strategies. Such decentralization can increase access to local information,
mobilization of social capital for effective cooperation, participation of beneficiaries in the
decision-making process, the accountability of elected officials and the empowerment of poor
minorities (de Janvry et al. 2002). Especially for the heterogeneous rural non-farm sector, where
broad policies might not be the most appropriate to stimulate the sector`s development,
decentralization might be necessary to allow for locally adapted interventions (Lanjouw and
Lanjouw 2001).This has led to a revival of previous community-driven development and
participatory development ideas. The World Bank, for example, has adopted this approach in
recent years by increasing its lending for such projects (Mansuri and Rao 2004). It is not clear
that the problems that previous approaches faced will not occur again, in particular because of
capture of program benefits by local élites (Bardhan and Mookherjee 2006, Lanjouw and
Ravallion 1999). Community-based safety-net programs work best to target the poor if
communities have egalitarian preferences, whereas heterogeneous communities can suffer from
conflicting ideas (Cooning and Kenvane 2002). Incorporating civil society ­ farmer
organizations or NGOs--into today`s rural development strategies can benefit the poor. It can
help to overcome market failures and deliver services locally. Such organizations can help their
members reach economies of scale and thereby obtain credit or other services, which they could
not otherwise obtain individually. In the proper management of common resources and/or of
environmental resources to guarantee the sustainability of their agricultural system, communities
and civil society can also play a key role. De Janvry et al. (2002) suggest that cooperation of
such organizations with the public sector can lead to successful partnerships in which each party
specializes according to its comparative advantage. Finally, institutions in which social capital
among group members plays an important role are important in rural areas. This is the case for
group lending in which peers are jointly responsible for the loans of individual members, since it
can help overcome credit market failures due to moral hazard and adverse selection problems.
34
Agricultural Policy and Food Security
The discussion so far has focused on domestic concerns. We now turn to international
dimensions of agricultural policy. The past decade has experienced a worrisome rise of
protectionism--in spite of the ongoing World Trade Organization Doha Round of trade talks,
launched in 2001, meant to foster trade liberalization, which put developing country needs at the
top of the agenda. Both developed and developing countries maintain high protection for
agriculture, which creates a drag on developing countries` agricultural exports. In addition, in the
name of food security, some countries have reacted to food price increases with additional
protectionist policies, such as export bans in Vietnam and India.
Market Distorting Policies of Developed Countries
Trade flows have grown more than twice as fast as aggregate GDP over the past 30 years.
The developing world`s share of global trade increased from about one-quarter to more than one-
third and the composition of their exports has been upgraded. For a long time they were
exporters of primary commodities and importers of manufactured goods, but over the past two
decades they have moved strongly into manufactured exports. The export share of developing
countries in global manufacturing exports was 20 percent in 1990/91 and rose to 42 percent in
2006/07. For agricultural exports the numbers are 32 percent and 41.5 percent, respectively.
Moreover, trade among developing countries also gained importance. While 4 percent of global
manufacturing exports went from developing countries to other developing countries in 1990/91,
it increased to 20 percent in 2006/07. For agriculture, the corresponding numbers are 7 percent
and 20 percent (Aksoy and Ng 2010).
Despite these changes and several rounds of trade liberalization, many developing
countries have been unsuccessful in integrating with the world economy. Nearly all the growth in
developing country shares of trade has been driven by middle-income countries. By contrast, the
49 least-developed countries--most of which are in Africa--have gained no market share at all.
Moreover, some regions have seen much smaller shifts in the composition of their exports. The
manufactured share of merchandise exports is 80­90 percent in East and South Asia but only 60
percent in Latin America. Africa and the Middle East have yet to reach the 30 percent mark, and
35
many countries--particularly poor countries--remain dependent on exports of agricultural goods
and natural resources.
Trade barriers in developed countries share the blame for this stagnation. True, in almost
all slow or non-integrating countries the investment climate has not been favorable enough--for
a range of reasons, including resource depletion, weak infrastructure, and poor economic
management--to attract the investments needed to transform export patterns. Thus steps to
strengthen the investment climate need to be a major element of any strategy to promote
integration. But developing country exporters have also faced obstacles to developed country
markets in every major sector--agriculture, manufacturing, and services.
Developed and developing countries alike maintain high protection especially for
agriculture, creating a drag on developing countries` agricultural exports. In 2004, agricultural
policies contributed 83 percent to the welfare cost of overall trade-distorting policies in
developing countries (Valenzuela et al. 2009). Of particular concern are the pockets of protection
against products of interest to developing countries, especially agriculture. Developed countries
continue to impose substantial obstacles on imports from developing countries, despite pledges
to remove or reduce them. High-income countries provide more than $300 billion a year in
domestic agricultural subsidies--three times the amount of aid to developing countries--and
block or discourage agricultural exports from developing countries in many other ways.
Developed countries have tariffs and quotas on textile imports that cost developing countries an
estimated 27 million jobs. Other tariffs and nontariff barriers further undermine manufacturing
and employment in developing country industries.
Developed countries have an extensive network of protection and support for their
agricultural sector, mainly border barriers and subsidies. Border barriers, such as tariffs and
quantitative restrictions, are designed to support prices in domestic markets. This form of
protection most distorts international markets and harms developing countries, and accounts for
about 70 percent of protection in OECD countries. Production-related subsidies given to farmers
under different schemes, called direct support, usually take the form of direct budget transfers
and are much less distortive. Agricultural goods produced behind high tariff walls and with
production subsidies often require export subsidies to be sold in world markets. These
agricultural policies raise costs of $17 billion per year on developing countries, which is five
36
times the overall flow of overseas development assistance to agriculture. To export their
agricultural goods to OECD countries, they must overcome tariffs at least 10 times those on
typical intra-OECD exports (of all products). The average tariff that developing countries face
for agricultural products in general is 16 percent compared with only 2.5 percent for
manufactures (Anderson and Martin 2005). Moreover, OECD countries provide agricultural
subsidies that drive down world prices for agricultural exports, undermining the livelihoods and
markets of farmers in developing countries. Although efforts have been made over the past to
reduce average support to agricultural producers from 37 percent of gross value farm receipts in
1986-88 to 30 percent in 2003-2005, the absolute amount increased from $242 billion to $273
billion a year over the same period (World Bank 2007). The issue here is not the support that
developed countries provide for rural development; it is the size and form of that support and its
pernicious effects on the prices of goods produced by developing countries.
Developed countries have made some efforts to address this problem, introducing
preferential schemes that give the poorest countries--primarily those classified as least-
developed countries--duty-free access to their markets. Examples include the EU Everything
But Arms initiative and the U.S. African Growth and Opportunity Act. But these schemes have
had limited impact. For example, Everything But Arms grants preferential access to exports from
the least-developed countries but only half of eligible exports are actually granted preferences.
Under the African Growth and Opportunity Act, the most generous provisions are granted to
apparel exports from Sub-Saharan Africa. But 99 percent of apparel exports under the act come
from just seven Sub-Saharan African countries, and only two of these are least-developed
countries (Madagascar and Malawi). The low coverage of these schemes is primarily the result
of complex rules of origin, complicated administrative requirements, and the weak trade capacity
of developing countries. Finally, most of the world`s poor people are located outside Africa and
the least-developed countries. Thus preferential market access that targets these countries
excludes a large share of the world`s poor people--and could even hurt them through the trade
diversion that may accompany these schemes. A more open global trade system would be far
superior.
A more open trade system would generate enormous benefits for all countries--and
particularly for the world`s poor people. Removing all trade impediments would reduce poverty
worldwide by 3 percent (Anderson et al. 2010). The bulk of the gains from liberalizing
37
merchandise trade would come from agriculture, not only in OECD countries but also in
developing countries, where tariff barriers are often as or even more distorted as in OECD
countries (although the degree of distortion on the production side, through subsidies, is
generally much lower). Reducing agricultural protection--including trade-distorting tariffs,
quotas, other export subsidies, and anti-development tariff escalation and tariff peaks--is the
most important step for development.
Not all developing countries would benefit from liberalization of agriculture. Serious
reforms in global agricultural trade policies would lead to higher prices for many products now
protected, and these price changes could initially lead to balance of payments problems for low-
income countries that are net agricultural importers. But if we take out oil exporters and
countries with temporary deficits worsened by conflict, only 14 low-income countries are net
food importers (excluding oil exporters and countries in conflict). Three of these countries
account for 80 percent of the net imports: Bangladesh, the Democratic People`s Republic of
Korea, and Pakistan. The other 11 countries have a deficit of just $565 million, a small
percentage of their trade. These countries would also gain from price increases, because their
exports are also predominantly agricultural, as well as from other aspects of multilateral trade
negotiations. Still, the international community should be prepared to provide assistance to help
countries adjust to and take advantage of new trade opportunities.
Food Security, the Recent Food Price Crisis and Its Consequences
The concept of food security covers not only the amount of food required to guarantee
absence of hunger, but also the right choice of nutritional intake to avoid malnutrition and health
issues (Barrett 2002). Although food insecurity can arise due to shocks at the national level
putting entire populations in danger, it occurs at an individual level as a result of idiosyncratic
shocks as well. At the height of the world food worries of the late 1960s and early 1970s (for
instance, at the 1974 World Food Conference), the focus was on deficiencies in, and volatility of,
production. Now the focus is clearly on access to food. Even when food is available in
sufficient quantities, poor and vulnerable groups might be unable to consume food sufficiently
and adequately because they lack access to it. Amartya Sen, for the first time in 1981, shifted the
focus from supply side threats to food availability to demand side issues that prevent households
and individuals from access to food products. Limited demand and access can arise, for example,
38
as a consequence of employment and income shocks. Today`s threat to global food security
indeed does not arise from lack of supply but from lack of access. The world has more than
enough food to feed everyone, yet 850 million are food insecure (World Bank 2007, p. 94).
Although the recent food price crisis was partly caused by agricultural supply shocks and food
supplies did get scarcer, the issue of food security was not directly related to world food
availability but to food accessibility by the poor in developing countries. Distributional issues
and accessibility are equally crucial. The food crisis emerged due to a sharp spike in food prices
around the world, which emphasized the vulnerability of the poor with respect to high and
volatile food prices. In 2008 food prices peaked after a steady increase over the previous years,
reaching a 30-year high (FAO 2010a). Since then, prices have fallen but remain above their
secular trend, as can be seen in Figure 2. In addition to the price level, price volatility has also
increased (Headey and Fan 2008).
Figure 2. Food Price Index
Food prices play an important role for the poor since food consumption constitutes a
large fraction of their income. Approximately three-quarters of their income is spent on staple
foods so that food price increases have a major impact on poor consumers and are a threat to
their food security.15 Ivanic and Martin (2008) estimate that the recent crisis has pushed an
additional 105 million people into poverty, thus setting back poverty reduction efforts by seven
years. In Sub-Saharan Africa poverty is estimated to have increased by 2.5 percentage points as a
result of the crisis (Wodon and Zaman 2008). Even if income shocks from higher food prices are
15
We focus here only on consumers because most poor people, even if they are agricultural producers themselves,
are net consumers of food commodities (FAO 2008).
39
short-lived, they have long-term effects for household food security and welfare. For example,
households try to cope with such shocks by lowering calorie intake. Torlesse et al. (2003) show
that the percentage of underweight children in Bangladesh is negatively correlated with
expenditure on rice (because lower rice expenditure allows more income to be spent on higher
quality food). Rice expenditure in turn rises with rice prices. In addition, households sell assets
such as livestock and spend less on children`s education as shown by a recent survey in
Bangladesh (Wodon and Zaman 2008). Such coping strategies can lead in the long run to lower
labor productivity and less accumulation of human capital, which can prevent households from
getting out of poverty again once food prices are back to lower levels. As a result, households
that are pushed into poverty because of temporary shocks may become chronically poor.
In order to evaluate the future potential of renewed food crises, the factors that caused the
recent price spike have to be understood. The literature suggests that several causes have
contributed to the price increases.16 First, higher fuel prices have led to high production costs in
agriculture by raising the cost of inputs such as fertilizers. Second, the depreciation of the dollar
vis-à-vis previous years has led to higher prices of US$ priced commodities. Third, diet changes
around the world, and especially in China and India, have caused a higher demand for meat and
thereby for feed grains. Fourth, increased bio-fuel production in the United States, the European
Union and Brazil increased the demand for feedstock and put pressure on the land area used for
food production. The European Union and the United States subsidize production while Brazil is
the only competitive producer of biofuel. Fifth, weather-related shocks leading to droughts and
low harvests have hit countries like Australia and Russia. Finally, financial speculation in the
agricultural commodity markets may have contributed to food price increases (von Braun and
Torero 2009). Although some of these factors had more impact than others, all of them seem to
have jointly contributed to the spike in food prices over the past years.
An additional factor that has amplified the rise in the level and volatility of food prices
has been the low level of global stocks of food staples. In 2007, the stock-to-use ratio of grains
and oilseeds reached the lowest level since 1970. Stocks can function as a buffer for market
16
See, for example, FAO (2008), Timmer (2008) and Trostle (2008). Timmer (2008) and FAO (2008) suggest that
high bio-fuel production is one of the main reasons for increased food prices, whereas the diet taste changes in India
and China seem to be less relevant for short-term price behavior.
40
shocks and thereby dampen the effect on prices. However, as shown in the competitive storage
model of Deaton and Laroque (1992), if stocks are very low, shocks in the market will be fully
reflected in price behavior. Increased prices will then look like spikes although they reflect the
normal price behavior that would exist in the absence of any storage. Since the middle of the
1990s, global food reserves have declined as countries such as China have deliberately reduced
their stockholdings and, as a result, shocks to food markets could not be attenuated by releasing
accumulated quantities.
Although the food price increase of 2006-2008 seems drastic compared with previous
years, the peak was not higher than others during the past century (Baffes and Haniotis 2010).
Sharp price hikes have been rather infrequent over the past 50 years--but recent forecasts
suggest that prices could stay above their 2004 level for some time (Zaman et al. 2008), although
wheat and rice prices are expected to decline in 2010 (FAO 2010b). Volatility is expected to be
higher than at the beginning of the century (Headey and Fan 2008), although implied volatility
from the derivate market seems to have stabilized and started to decline again, implying a
possible decline in actual price volatility. Nevertheless, the recent crisis makes it clear that stable
agricultural production is not only important for food availability, but also to allow poor
households in developing countries to access food supplies at an affordable price.
Price Transmission and Stabilization Policies
International food prices are an important indicator of the global food situation, but what
ultimately matters for the poor and their food security in developing countries are the domestic
prices they pay for their food. To measure the effect of international food price volatility on the
poor, one needs to know how much of this volatility is transmitted to domestic markets and
passed to consumers. If a country is well integrated into world trade and there are no policy
interventions, international prices are fully transmitted to domestic markets. Evidence on price
transmission is mixed. For example, Mundlak and Larson (1992), using a data set for 58
countries over 1968 ­ 1978, estimate that international agricultural prices are almost completely
transmitted to domestic markets. A disaggregation of prices into single commodities shows that
the transmission of wheat prices, for example, is lower than the average for agricultural
commodities. Moreover, the authors find that the main part of domestic price instability is caused
by volatile international prices. However, Baffes and Gardner (2003), investigating eight
41
developing countries, conclude that international price volatility does not explain a main part of
domestic price instability. In only three of the eight countries price transmission is significant
and domestic price volatility follows international price movements. For the recent crisis, Dawe
(2008) estimates the transmission of world cereal prices to seven Asian countries. He finds that
one-third of real international price increases have been passed to domestic markets. A recent
FAO study (2008) finds that, whereas wheat prices in Chile closely followed international prices
over 2003 ­ 2008, in Argentina there was a substantial gap between domestic and international
prices, which was augmented over the years.
Figure 3. Global Grain Stock-to-Use Ratio (in percent)
Thus, price transmission from international to domestic markets varies across countries
and commodities. Trade restrictions and other policy interventions lead to imperfect price
transmission. Countries have deliberately made use of market interventions to limit price
transmission from international markets in order to stabilize domestic prices. In the 1970s,
international commodity agreements, which set a price-band supported by stocks released when
prices hit the ceiling and accumulated when prices were near the lower bound of the band, were
very common. However, these price-bands soon failed. Numerical analysis reveals that most of
the time, prices will be either at the ceiling or at the floor of the defined band, which is in
contrast to the aim of stabilizing prices around the middle of the band (Wright 2009). The
success of using buffer stocks to manage the price instability of agricultural commodities is thus
42
limited. For example, Srinivasan and Jha (2000) estimate that India`s use of buffer stocks in the
wheat market leads to more price volatility than would be observed under liberalized trade.
During the recent food crisis, export bans and other export controls were introduced in
several countries, including India and Vietnam. Although they succeeded in stabilizing domestic
prices, these export bans led to more instability in international rice prices and contributed to the
sharp increase in the rice price (Headey and Fan 2008). More generally, a country trying to
isolate the domestic from the world market imposes more pressure on the international market
and hence other countries to absorb shocks, which, in turn, increases international price volatility
compared with the free-trade scenario (Bale and Lutz 1979). If international prices are only
partially transmitted to domestic markets, policies meant to stabilize prices may be ineffective.
Even if they successfully reduce volatility relative to international prices, the absolute effect on
volatility may be negligible because global instability increases at the same time.
New price stabilization mechanisms have been proposed in the recent literature, including
an international reserve to which member countries would contribute specified amounts (instead
of domestic reserves). The international reserve would be released in times of emergency at the
discretion of a supervising committee. Wright (2009), however, suggests that such a global
agreement might fail due to lack of commitment by member states. Another related approach to
prevent price hikes calls for a virtual reserve that would operate by engaging in the markets
whenever prices are outside a specified band (von Braun and Torero 2009).
Mitigating Food Price Volatility and Ensuring Food Security
The main reason for price stabilizing efforts by governments and the use of export bans
during times of crisis is to ensure food security. Given the mixed success of price stabilizing
policies, the question arises if such policies are necessary to prevent adverse effects of volatile
prices on the poor or if other measures, such as the improvement of social safety nets, might be
more effective in helping individuals in developing countries to cope with unstable food prices
and to guarantee food security.
Governments have used different domestic instruments to protect consumers from high
food prices, including food subsidies. In the Middle East and North Africa, subsidies on bread
and grain have existed for a long time. In response to the recent food crisis, Yemen and Pakistan
43
have introduced subsidies on wheat. Although food subsidies are meant to support the poor, they
are often not well targeted. And subsidies are direct interventions in the market and can lower
incentives for producers (World Bank 2008). Social safety net measures such as food-for-work
programs, school feeding or in-cash or in-kind transfers are more targeted instruments to protect
consumers from high food prices but are less common than market interventions or trade policy
measures (Demeke et al. 2008). Bangladesh, for example, has recently extended its work-for-
food program in response to natural disasters and higher food prices (Coady et al. 2003). It is
important that such safety net arrangements be in place before a shock hits in order to be
effective. In that case, they can prevent households from falling into chronic poverty by helping
them cope with higher food prices. However, most social safety net policies only address long-
term poverty and are not tailored to cope with transitory income shocks. Hence, new, innovative
approaches have to be developed for social safety nets to respond quickly to unexpected shocks
(Byerlee et al. 2010). As a positive example, recipient households of conditional cash transfers in
the Progresa program in Mexico that suffered from income shocks have showed lower school
dropout rates than non-recipients (Alderman 2008, de Janvry et al. 2006). This also suggests that,
whereas trade policies or market interventions can only smooth aggregate shocks to food
security, such as higher overall food prices, social safety net measures can also help to overcome
idiosyncratic shocks to households and guarantee adequate food accessibility. Often, however,
limited government budgets do not allow for extensive safety nets. As a result, increased
productivity in subsistence farming is probably the most effective way to guarantee food security
for small farmers. Moreover, investments to increase productivity are long-term instruments for
agriculture for development. While short-term policies to cope with transitory shocks are
important, the long-term measures described above ­ such as productivity increases, developing
more shock-resistant crops, improving farmers` access to modern markets and creating
employment opportunities in the rural non-farm sector ­ will be necessary to reduce the risk of
shocks ex ante and guarantee food security in the future (Byerlee et al. 2010).
Conclusion
Sadly, food and agriculture are now back in the headlines because of poverty linked to
price volatility and high food prices is on the rise. In the past few years, there have been various
attempts to address the issue of food security ­ including an international race for agricultural
44
land, large private investments in agriculture attracted by favorable markets, disruptive
protectionist policies in food staples, revival of large-scale subsidies to agriculture in the name of
food self-sufficiency, and new commitments by donors to increase spending on agriculture after
20 years of neglect.
This paper has reviewed the economic literature related to agricultural policy. Since the
key question is how to use agriculture in support of a structural transformation of the economy,
we began by examining the role played by agriculture in the development process and its
interactions with other sectors. In poor countries, agricultural growth has a huge capacity to
reduce poverty. Due to this potential, improving productivity in the agricultural sector in
developing countries is critical and an essential step to reach the Millennium Development
Goals. Some 75 percent of today`s poor living in rural areas would benefit massively from
higher incomes in agriculture. Moreover, agriculture also has the potential to generate economic
growth in developing economies that depend to a large extent on this sector, for example in
many Sub-Saharan African countries. But this presupposes major increases in productivity that
depend on a range of factors--new technologies and their adoption; farm size and access to land;
overcoming environmental challenges--for which we do not have silver bullet solutions. The
most difficult challenges are institutional and are related to market failures, missing markets and
property rights. Agriculture can also be an engine of growth and provide employment
opportunities for the rural non-farm economy because of its linkages with small cities and rural
areas. Rural development and community-driven development can assist in this process. The
government will need to play an important role for many of the tasks suggested in this paper. It
should not, however, be the only purveyor. The private sector will be the main source of
investment funds and a supplier of services. Donors, NGOs and civil society organizations (who
benefit from local and external private expertise when implementing projects) will also play a
key role. To identify the right mix of these actors and to establish an effective cooperation
among them will be important.
New approaches to increase productivity in these countries have to be found. The
possibility of further land expansion to increase agricultural output will soon be exhausted and
intensification will be the only way to increase productivity in the future. For its Green
Revolution, Africa therefore needs high-yielding varieties that are adapted to local conditions. In
addition, to guarantee adoption of such crop varieties and to integrate small farmers into modern
45
value chains, existing barriers ­ such as low education, missing infrastructure, lack of credit and
insurance markets ­ and insecure property rights have to be addressed. And new ways of
information dissemination and learning methods, such as the use of communications technology
in extension services, can foster adoption and profitable cultivation among farmers. Increasing
productivity among smallholders in developing countries is also an instrument to guarantee food
security in the long-run.
As if new evidence was required, the 2008 food crisis has demonstrated once again the
vulnerability of the poor to income shocks due to food price increases. As commodity prices rise
once again, it is important to adopt measures to limit volatility and put in place effective coping
mechanisms. Macroeconomic approaches to stabilize prices in national markets are not
promising. Policies such as social safety nets, which help the poor to cope with income shocks,
have the potential to mitigate adverse effects and prevent households from falling into chronic
poverty. Beggar-thy-neighbor trade policies to stabilize prices and guarantee national food
security have been counterproductive: during the 2008 food price crisis, policies adopted by
some developing countries have harmed poor populations and reversed some past gains. The best
instruments to protect small farmers from income shocks are ex-ante measures such as increased
productivity that reduce the risk of shocks in the first place.
46
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